IT services vendors to push pricing by 4-5%

Rising salary levels, higher attrition, building onsite presence and investment in creating intellectual property is making Indian IT services vendors push the billing rates up by 4-5 per cent, says a study.

The study by Offshore Insights claims that economic pressures and scarcity of business in the last two years have made offshore players humble but nimble. The last quarter of 2010 and the first few months of 2011 have shown signs of recovery as many Indian vendors logged good growth and claimed a strong deals pipeline.

“The new study shows that macro-economic factors and rising costs will push offshore billing rates up. Our interactions with top and rapidly growing offshore vendors show that they may not adopt the same flexible approach they did in the last two years,” said Sudin Apte, Principal Analyst and CEO, Offshore Insights.

Some of the indication of pricing going up is already evident. For instance, Tata Consultancy Services (TCS) has said that pricing, though has been flat for 2010-11, it has not dropped. In case of Infosys Technologies, pricing was up by 2.1 per cent on constant currency basis for the quarter.

As firms slowly recover from recession, many North American and European companies are looking to leverage offshore services more to counter budget pressures. This is evident from the rising offshore pie among all the large and mid-sized IT services players. ”

Add to this a weak dollar resulting in less rupee realisation. The US dollar to the Indian rupee conversion rate has fallen by nearly 5 per cent in the past few weeks. The dollar that was trading at over Rs 46 on February 1, 2011 tumbled to Rs 44 in April. This drop directly impacts Indian providers’ earnings in the local currency and puts substantial pressure on them as over 60 per cent of their costs are incurred in Indian currency,” said Apte.

Meanwhile, most of the IT firms are already managing a tight ship. Over the last two years, all of them have initiated productivity measures. This has been bought in by getting lean organisation and process standardisation resulting in 4-5 per cent savings. Tight cost control has resulted in a drop of general and administrative cost and others. “The vendors total cost is up by almost 10 per cent. They have managed this despite the fact that their profitability was hit,” he added.

However, the report recommends that with riding cost pressures and currency fluctuations, clients should focus on new price mechanism rather than haggling for discounts. Some of the options suggested are: moving away from time-and-material pricing, shifting offshore work to more industrialised delivery models, among others.